Although the rollback of the higher surcharge on foreign portfolio investors (FPIs) structured as trusts is ruled out, the government hasn’t still abandoned the idea of giving some relief to them. People aware of the discussions on this issue, which is believed to be behind roiling of the markets in recent weeks, along with various macro data that suggest a clear economic slowdown, said one option could be a one-time capital gains tax waiver for such FPIs wanting to convert.

Replying to discussions on the Finance Bill 2019 in Parliament on July 9, finance minister Nirmala Sitharaman declined to remove or relax the applicability of the new super-rich surcharge on FPIs, but advised those staring at an increase in tax outflows to shift to the corporate structure where the Budget hasn’t made any change in tax treatment.

Tax experts, however, said such a shift by FPIs using the trust structure would have been easier had the government given them a one-time waiver from the capital gains tax. Since many of these ‘Trust FPIs’ may also have considerable unrealised gains, the tax cost of conversion could dissuade them, experts warned. They also said such conversion might not be structurally possible in many jurisdictions from where the FPIs, which typically invest in India, operate. More than a fifth of the FPIs investing in India equity, debt and hybrid instruments use the trust route.

“The (FPI surcharge) issue has been discussed with the Prime Minister’s Office (PMO) among other economy-related topics but a structured meeting on this specific provision hasn’t happened. For such a meeting, we will have to first meet FPIs to understand their problems,” an official told FE.

With the surcharge on categories of taxpayers with income above Rs 5 crore rising by 22 percentage points, long-term capital gains tax on FPIs using the trust structure would now be 14.25%, against 12% earlier, while short-term gains would rise to 21.4% from 17.9%.

FPIs, including pension and retirement funds, educational endowment fund, etc, come in through the trusts route because it has been the most tax-efficient structure. Typically, a corporate fund would have to pay MAT at over 18.5% and an additional 20% as dividend distribution tax.

Despite the hike in surcharge, FPIs still might find trusts the least taxing structure, although the post-tax returns in the hands of foreign investors could fall. Given that emerging markets like India provide better returns, most trust funds could continue to invest in India. They will pull back only if other determinants like corporate earnings and the fundamentals of the Indian economy compared with other nations also tend to turn worse.

Source : Financial Express